Sizzling Start-ups — 10 E-Commerce Companies to Watch — Health Site’s Business Thrives
Sometimes success is based on the quantity of business as well as the quality. This may prove true in the case of Neoforma, Inc. . . .
Internet Week, February 8, 1999
Nearly three years after starting Neoforma we caught our first glimpse of real, potential competition—mere shadows of shapes, moving along the periphery...
They paid attention to us too. When we changed the design of the pages we created to direct traffic to us from the search engines, a week or so later, they duplicated our techniques. When we switched our site background from white to black, sure enough, theirs became black within a couple of weeks. It was irritating, but quite flattering.
That anonymous group of fellow pioneers eventually wandered off the trail, never to be seen again. I sometimes wonder if they continued to watch Neoforma. I imagine them sitting together, and occasionally setting down their beers, to say, “That could have been us. Those guys didn’t have shit on us . . . and just look at what happened to them. Bastards!”
But the whiff of competition was different this time. We weren’t the only Internet healthcare company getting attention.
At the beginning of February, we hired our first celebrity. Well, he wasn’t really a celebrity. We just thought of him that way because we were celebrating the arrival of a guy who would later come to be known simply as “Sonic.”
Alexander, JP and Jeff had hired him. Through some of his connec- tions to the software industry, JP knew of Sonic and his reputation. Sonic was a well-known, high-level salesperson from one of the largest software companies in the area. He was the kind of guy who received daily calls from headhunters offering lucrative jobs. He had choices. And he had chosen Neoforma.
I first met Sonic after he had been hired. He walked into my office, rolled the extra chair to my side of the desk, straddled it casually, tinkered with some trinkets on the credenza, glanced smoothly up at me and said, in a slightly Southern, good ol’ boy accent, “So, I’m told you’re the guy who’s running quite a few things around here. Tell me what you think Neoforma is about.”
Sonic was a big guy, well-groomed, but not over dressed. He wasn’t yet known as Sonic, but would be soon because of his always close-cut hair, which resembled the spiky coat of a hedgehog. There was a computer game with a character named Sonic the Hedgehog. The character didn’t actually have close-cut hair or resemble a hedgehog, but the moniker seemed to stick.
Sonic was smooth. He was charming. His first phrase was carefully constructed to stroke my ego. And so was every other phrase. He used a very effective, self-deprecating style--I don’t know anything about this, but I sure want to learn all about it from you. He was a relationship guy, used to discussing large deals over expensive lunches. That’s why we hired him. Sonic was the guy who would later ensure that he could always get a table at a prestigious Palo Alto restaurant by putting the maitre d’ on the list of people who would be able to buy early Neoforma IPO stock.
After getting to know the company, Sonic went on the road, wandering the halls of many venerable hospitals for about three weeks, then returned to give us his first summary of where he thought Neoforma was in the eyes of hospital executives.
He had some good things to say. We had fairly good name recognition. Nobody had anything really bad to say about us. The executives did consider their supply chain process to be a major candidate for improvement.
But the most interesting information of all was that he heard people in healthcare talking about a new company called Medibuy. They were talking about how much Medibuy was saying bad things about Neoforma. Medibuy was telling anyone who would listen how much better they were than Neoforma. Medibuy was picking a fight.
This was not necessarily a bad thing. In a business focused on fighting microscopic bugs and invisible diseases, everyone loved to see fights play out on a grander scale. Healthcare execs were getting excited about us for the first time.
At that point, Medibuy had a very simple website, consisting primarily of a list of categories of hospital equipment. Each category name was a link that, when selected, would send an email message to Medibuy. Medibuy’s entire business consisted of a couple of materials managers picking up the phone and contacting manufacturers to ask them for money in exchange for a customer lead. That’s it.
I have to admit that it was a clever ploy. We had yet to solve the problem of how to force manufacturers to actually respond to the customer requests we forwarded to them. We sent them faxes if they didn’t use email and we called them if they didn’t respond to the faxes, but we still held true to the idea of not becoming another hurdle in the communication process. We insisted that manufacturers respond directly to their customers.
By sending false messages through our messaging system, the low-tech materials manager who had founded Medibuy discovered that many manufacturers were slow to respond to customers, or didn’t respond at all. They decided to exploit this weakness in our system. Instead of dealing with the inadequate resolution of a percentage of the tens of thousands of messages per month we had, Medibuy chose to carefully hand-carry a small number of messages to manufacturers. Almost overnight, they were able to look like us.
A little research on our end revealed that Medibuy was funded by second-tier venture money. It wasn’t top-tier money, but money was money. Using us as the measure of their potential, they had been given more money in their first few months of existence than we had received in our first few years.
For awhile, we were indignant that a company had stepped into our spotlight with such ease, instantly benefiting from our efforts in defining a new industry. But soon, we realized that, as long as we were ahead—and we were still very far ahead—the efforts of competitors would simply enhance and validate our standing.
Hospital personnel became more enthusiastic and attentive. Manufacturers and distributors became more polite and cautious. Venture firms began calling us. Our employees became a bit less complacent, a bit more nervous and a bit more focused.
A few months later, we discovered that another competitor was being formed at about the same time as Sonic’s first presentation to us. A team of well-connected techies who had just sold their previous company were looking for their next big thing. They had narrowed in on the healthcare supply chain because of its huge financial potential.
They were supposed to be a big secret, but we knew about them—who they were, what their strategy was, who they were courting. They spent months studying us and then our limited competitors. They gave each other presentations about how they could do things so much better than Neoforma by embracing the distributors rather than threatening them. These undoubtedly bright minds thought this was an original idea.
We had dealt with the distributors many times over the last couple of years. We knew that their idea wouldn’t work and we knew why it wouldn’t work. We had already tried it. They could have asked us. We would have been happy to tell them, but they didn’t ask.
Instead, they found some fresh investors and hustled thirty million dollars or so to go after us, calling us “the 800 pound gorilla.” A few carefully presented statements by us at investor and customer confer- ences were all that was required to squelch their plans, but not all of the competitors were so easy to deal with.
Over the next two years, we would document the steady increase in our number of competitors, until the list included more than one hundred legitimate companies. Dozens of these companies received substantial investment, from millions to hundreds of millions of dollars.
All targeted at us. From that February on we were constantly distracted by the need to glance over our shoulder, ready to duck as each shadow enlarged over our head, wondering if this one would be the one to strike hard enough to cause damage.